The ensuing up of hard austerity measures with skyrocketing inflation rates, soaring energy prices in Europe has in fact sent economic ‘shockwaves’ to the world afar with a promise of dire consequences in the future as well. The geopolitical map of Europe is changing ever more fast with the ongoing Russia-Ukraine conflict poised to offset the supply chains that have supplied the world with grain and gas and this doesn’t stop here, all of this combined with the economic sanctions from European nations could in fact make Russia hesitant to supply its rich reserves of gas which is what is happening today. The scale of the present crisis has to be understood in full scale and width, its ramifications on businesses both in and out of Europe assessed in their proper proportions. In short, Europe is bracing for a very cold winter which promises economic hardships, climate upheaval, and political conflicts all at the same time.
The IMF and the World Bank have time and again warned of a potential economic crisis that may hit the Euro zone, and has in fact severely downgraded its growth forecasts for the years 2022 and 2023. It also added that the recent output fall in major economies such as the US and China could potentially be hazardous to the whole world, with the global economy teetering on the brink of a disastrous recession. Major grievances have been outlined in their diagnosis.
- Soaring Gas prices in Germany, France, UK and other Baltic Nations as a result of Russia-Ukraine conflict.
- High inflation potentially due to major supply chain disruptions and labour market pressures.
- Trade wars and geopolitical fragmentation both within and outside the EU.
- Debt crisis triggered by tighter global financial conditions
- Gloomy outlook of investors and the failure of European entrepreneurs to attract funds from them.
Rishi Sunak might have risen to the helm of the British political establishment but he must realize that financial straits UK and its allies are and which could possibly exact enormous political consequences. We must now elaborate on the problems highlighted above with major economies of the EU corroborated on their current states.
Soaring Gas Prices and the Economic Imperatives- Nowhere is this problem of rising gas prices more acute than in the industrial hub of Germany with major manufacturing units seeing a record fall in their industrial output. The looming energy crisis, months without rainfall as a result of climate change has seen Europe’s largest economy being battered in this global economic storm. Russia supplied more than half of Germany’s gas in 2020 and about a third of all oil. A major pipeline construction was halted as sanctions on Russia were mounted but all of this as we have repeated has consequences and poor Germany has to now face the burden of this tale of international geopolitical maneuvers. The high cost of heating homes in winter, construction and manufacturing units stalled for lack of gas, rising inflation rates, precarious diplomatic relations with Russia and China plus the moral stalking by US and its NATO allies for not effectively sanctioning Russia have all practically downgraded Germany’s growth in this year and the year ahead. Germany can in no way sideline Russia because of its supply chains and the other promises it bears on the economic front. This is not to say Germany hasn’t done enough, it is only a reminder of how international diplomacy works, and forsure Putin knows that quite very well as we have seen what happened with the Nordstrom pipeline, a major highlight in the German story where the repercussions of sanctions were met by Russia in a very sly way. Russia in effect forestalled its gas supplies on the excuse of a major repairing issue. This tell tale diplomacy which even a kindergarten student would know the truth of!
High Inflation and the Euro Depreciation- The Euro zone big 4 economies Germany, France, Italy and Spain have seen very high inflation rates this autumn and the worst is yet to come. In the UK for example inflation is above 10% for the first time in nearly 40 years as households struggle with rising energy bills being their primary concern. Inflation stands tall in Germany with rates as close to 9%. Baltic states such as Estonia, Latvia, Hungary and Poland are in the centre of this crisis with rates at a whopping 23% in Estonia and close to 20% in Lithuania. Their close economic ties with Russia and the sanctions put on Russia thereof have been highlighted as the major cause. Steep slow down is being observed in these economies with stock prices falling and major investor gloom. The European Central Bank (ECB) has called to prioritise the fight against inflation with increasing the cost of borrowing which again could stagnate the economic development of these countries but has to be accepted for now as the lesser of the two evils. The ECB in its outing also predicted the growth of Europe at 3.1% this year and 0.9% the next. Things then herald a positive normalcy in the years ahead though.
Brexit paved the way for pound sterling and a non- Euro economy which for the time seems to be a very good choice with enormous depreciation recorded in the value of Euro as against the US dollar and Pound Sterling of Britain. It traded at $0.982 and £0.868 with estimates of it falling further. The policy changes of US Fed Reserves have seen the dollar floating at a stable rate this autumn although the situation is still quite uncertain.
Another Associated problem is the supply chain disruption the war has caused especially in the labour market. The absence of good quality labour in the highly developed Western economies has in fact derailed the economic engine of Europe, on top of it come the stringent immigration laws and policies of their government. The tensions triggered by the Ukraine conflict though, occupy the centre stage in all of this. The debt crisis in Italy and the election of a Far right radical in the recently held Italian elections should not be seen as separate events. The Giorgia Meloni government a Fascist offshoot, has promised to bring in even stricter immigration policies and economic laws that could potentially send the Italian economy down a spiral.
The Glimmer of Economic Hopes- Is it all dark and gloom with this story? It need not be. Christine Lagarde while highlighting the problems of this ongoing crisis said that there were in fact tentative signs of supply bottlenecks openings and a possible solution for getting out of the protracted debt crisis in a new form of financial model dubbed the Transmission Protection Instrument (TPI). In short it is a promise by the ECB to buy government bonds of the beleaguered economies of the EU if it thinks that potential yields would be gained from them.
Another positive sign is offered by the tourism sector where after a major Corona halt the tourism sector is seeing a major recovery. Coal and nuclear production have been accelerated and some experts claim that this crisis can be transformed in ways to help Europe transition to a Green Future swifter and stronger.
The problems of stalled trade negotiations, agreements and conflicts with China on human rights issues remain and continue to haunt these economies despite the glimmer of hope. A concerted effort has to be directed towards halting the ongoing conflict in Ukraine which in fact in serious terms has exacerbated food shortages in Sub Saharan Africa and Somalia. Hunger rates are rising in that part of the world pretty fast. Diplomacy routes have to be opened with immediate effects. The gloomy outlook of the investors must turn bright concurring with a new vision for the future. We can only hope though for this graph of gloom to turn into a matrix of profit and sustainability though suspension of it all never ever is a positive thing whether we are in the problem or out of it.